30) If the price elasticity of supply of a good is elastic and the good price increases, then the
increase in the good’s supply should be
A) greater than the increase in price.
B) less than the increase in price.
C) the same as the increase in price.
D) Cannot be determined from this information
31) Which of the following examples best illustrates the concept of derived demand?
A) An increase in the price of beef results in an increase in the demand for fish.
B) The higher the demand for automobiles, the greater the demand for steel.
C) The demand for Pepsi varies directly with the price of Coke.
D) The demand for a good varies inversely with its price.
32) The derived demand curve for a good component will be more inelastic
A) the larger is the fraction of total cost going to this component.
B) the more inelastic is the demand curve for the final good.
C) the more elastic are the supply curves of cooperating factors.
D) the less essential is the component in question.
33) The minimum wage is an example of a government imposed
A) price control.
B) price ceiling.
C) price floor.
D) Both A and B
E) Both A and C
34) If government imposes a price ceiling on a good that is below the market equilibrium price
A) a surplus will develop.
B) a shortage will develop.
C) producers will reduce their sales price.
D) consumers will reduce their demand for the good.
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35) When a government imposes a price floor on a good that is above the market equilibrium
price
A) a surplus will develop.
B) a shortage will develop.
C) producers will increase their sales price.
D) consumers will increase their demand for the good.
36) A tax that is imposed as a specific amount per unit of a good is a(n)
A) excise or specific tax.
B) sales or ad valorem tax.
C) compound duty.
D) income tax.
37) If government imposes an excise tax on a good and the tax burden is borne equally by buyers
and sellers, then
A) price elasticity of demand is unitary.
B) price elasticity of supply is unitary.
C) the absolute values of price elasticities of demand and supply are equal.
D) None of the above
38) Assuming mustard and burgers are complements, a decline in the price of burgers will
A) decrease the demand for burgers.
B) decrease in the quantity demanded of burgers.
C) increase the demand for mustard.
D) decrease the demand for mustard.
39) Other things remaining the same, an increase in the price of butter can be expected to
A) increase margarine sales.
B) decrease margarine sales.
C) increase butter sales.
D) None of the above
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Analytical Questions
1) The initial price of a cup of coffee is $1, and at that price, 400 cups are demanded. If the price
falls to $0.90, the quantity demanded will increase to 500.
a. Calculate the (arc) price elasticity of demand for coffee.
b. Based on your answer, is the demand for coffee elastic or inelastic?
c. Based on your answer to a., if the price of coffee is increased by 10%, what will happen to
the revenues from coffee? Carefully explain how you know.
2) The demand curve is: QD = 500 – 1/2 P.
a. Calculate the (point) price elasticity of demand when price is $100. Is demand elastic or
inelastic?
b. Calculate the (point) price elasticity of demand when price is $700. Is demand elastic or
inelastic?
c. Find the point at which point elasticity is equal to -1.
3) Suppose that the price elasticity of demand for wheat is known to be -0.75. Will a good wheat
crop (which increases the supply of wheat) be likely to increase or decrease the revenues of
farmers? Carefully explain.
4) The demand for salt is relatively price inelastic, while the demand for pretzels is relatively
price elastic. How can you best explain why?
5) Unions have generally been far more successful in organizing and raising wages in skilled
trades such as carpentry than in unskilled trades. Use the laws of derived demand to explain why.
6) Governments impose excise taxes on goods that have inelastic demand, such as cigarettes,
more often than in other cases. Why?
7) Demand and supply in the wheat market are given by:
QD = 2000 – 1000 P and QS = -500 + 1000 P
where Q is millions of bushels and P is price per bushel.
a. Find the equilibrium price and quantity.
b. Suppose that the government wishes to support farm income and thus sets a price floor of
$1.50/bushel. Find the size of the farm surplus.
c. What is the cost of this program to the government?
8) Demand is given by QD = 6000 – 50P. Domestic supply is QS = 25P. Foreign producers can
supply any quantity at a price of $40.
a. If foreign producers can sell in the domestic market, what is the equilibrium price? What is
the equilibrium quantity? How much is sold by domestic and foreign producers, respectively?
b. Under domestic government pressure, foreign producers voluntarily agree to restrict their
goods. What will happen to the price and quantity? What will happen to the amount that
domestic producers supply? What will happen to revenues of domestic and foreign producers?
9) You are told that the price elasticity of demand for widgets is -0.75, the income elasticity of
widgets is 2, and the cross-price elasticity of widgets and gadgets is 4. Carefully explain what
information you can gather from each of these figures.
10) If a good’s demand function is Q = 30 – 3P, then calculate the price elasticity of demand
when
a. good price is $3 using the point elasticity formula
b. good price is $4 using the point elasticity formula
c. good price decreases from $4 to $3, using the arc elasticity formula
d. good price is $5, using the point elasticity formula
e. good price increases from $4 to $5, using the arc elasticity formula
11) If a price of corn is $3.00 a bushel, 5,000 bushels would be demanded. If the price rises to
$4.00 a bushel, 4,000 bushels would be demanded.
a. What is the (arc) price elasticity of demand?
b. Based on this answer, if the price of corn rose to $5.00 a bushel, what would be the demand
for corn?
c. If the price of corn decreased from $4.00 to $3.00 a bushel, what would be the change in total
revenue for sellers of corn?
d. If the price of corn increased from $4.00 to $5.00 a bushel, what would be the change in total
revenue for sellers of corn?
12) Domestic demand for a good is QD = 3000 – 25P. The domestic supply of the good is QS =
20P. Foreign producers can supply any quantity at a price (P) of $30.
a. What is the domestic equilibrium price and quantity?
b. At this domestic equilibrium price, how much of the good will be supplied by domestic
producers and how much by foreign producers?
13) The income elasticity for most staple foods, such as wheat, is known to be between zero and
one.
a. As incomes rise over time, what will happen to the demand for wheat?
b. What will happen to the quantity of wheat purchased by consumers?
c. What will happen to the percentage of their budgets that consumers spend on wheat?
d. All other things equal, are farmers likely to be relatively better off or relatively worse off in
periods of rising incomes?